EVERYONE welcomed the news that the European Commission had given its approval to the measures taken to reign in the budget deficit and would not take any further steps in the excessive deficit procedure for Cyprus. Good news regarding the economy is very rare indeed nowadays (on Friday Standard and Poor’s downgraded our sovereign rating another two notches to junk status) and this may explain the optimism the Commission’s announcement and Olli Rehn’s comments sparked.
Having expressed their satisfaction, the politicians, quite rightly, turned their attention to the need for development projects that would stimulate demand and create jobs. The forecasts for this year are for a zero rate of growth, and with unemployment steadily rising, politicians recognise the need for measures which will boost business activity.
Finance Minister Kikis Kazamias stressed the point when he said that “no matter how many savings we make, we will not move forward if we do not increase the growth rate.” All the political parties agree with the minister who has said he would invite their representatives to a meeting in the coming days to discuss possible measures. Some are being put together by ministry technocrats and party representatives will probably make their own proposals.
The big question is where will the government find the money to finance development projects? The €2.5 billion loan it has secured from Russia will be spent on its immediate financing needs such as the public pay-roll and for servicing older loans, with next to nothing being left for any new projects. And it still cannot borrow from the international markets. The deficit may have been cut, but all available cash is still being poured down the bottomless pit that is the public pay-roll, leaving nothing to be spent on development.
This is why finance ministry technocrats have been working on measures that would stimulate the business sector. But they will have to come up with much better ideas than what have been reported in the press so far, such as incentives for investing profits in new projects and loan guarantee plans for small to medium businesses; another measure would be the speeding up of procedures for the granting of licences for big projects by businesses.
It is naive to think that such measures will make any difference. If the measures were implemented in normal times they may have worked but in recession much more attractive incentives are needed to persuade business to invest in new projects. Cyprus businesses face the added disincentive of prohibitive interest rates, which the banks seem to raise every few months. These are currently at between eight and nine per cent, not only discouraging new investments but also making it extremely difficult for existing businesses to service their loans.
No small- or medium-sized business will want to borrow money from the banks at the current interest rates, even if the government was offering guarantees. As for big businesses, surely they will put off any investment in major projects, for a couple of years, until the cost of borrowing fell to manageable levels. In short, the conditions for new investments to stimulate growth simply do not exist.
It is no secret that Cypriot banks are being extremely cautious because of all the problems they face, from the over-exposure to the Greek debt to the new capital requirements of the EU that have to be met by June. These problems were bound to have a resoundingly negative impact on the economy, made even worse by the inability of the state to borrow money from abroad for development projects.
Unfortunately, the government, despite the warnings, never understood the importance of promptly tackling the deteriorating state finances, ignoring the continuous downgrades of the economy which now bar Cyprus from international markets. If it could go to the markets now, it would have been able to fund some desperately needed development projects, instead of hoping in vain that businesses would take out unaffordable bank loans in order to kick-start growth.
When the politicians and the finance minister meet up to discuss the proposals for growth they will need to be very resourceful and imaginative because there are no obvious measures that can be taken. Perhaps they should also invite the bank chairmen and try to negotiate lower interest charges for development projects, if they want any to start this year.
